Reynolds v. McCullough

• Decision Date: 23 September 1987
• Docket Number: No. 04-85-00233-CV,04-85-00233-CV
• Citation: 739 S.W.2d 424
• Parties: Jack L. REYNOLDS, Appellant, v. John W. McCULLOUGH, Jr., et al., Appellees.
• Court: Texas Court of Appeals

Page 424

739 S.W.2d 424

Jack L. REYNOLDS, Appellant, v. John W. McCULLOUGH, Jr., et al., Appellees.

No. 04-85-00233-CV.

Court of Appeals of Texas,

San Antonio.

Sept. 23, 1987.

Rehearing Denied Oct. 15, 1987.

Thomas S. Terrell, Kerrville, for appellant.

James M. Pearl, San Antonio, for appellee.

Before CADENA, C.J., and ESQUIVEL and DIAL, JJ.

OPINION

ESQUIVEL, Justice.

This is an appeal from a judgment in favor of the appellee, John W. McCullough, Jr., et al. (McCullough), and against the appellant, Jack L. Reynolds (Reynolds) in a suit for possession of leased premises.

McCullough, the lessor, claims ownership of two leaseholds as an assignee of two leases from the original lessee. McCullough leased certain real property to Thorn's Properties, Inc. (Thorn) on August 1, 1974 (Ground Lease). An improvements lease was also executed by McCullough to Thorn on the same date.

On December 10, 1974, Thorn signed an Assignment of Lease which assigned the ground lease to the First National Bank of Kerrville (Bank) as security for a promissory note in the original principal sum of one hundred fifteen thousand dollars ($115,000.00). On that same date, Thorn signed a deed of trust conveying the ground lease and land to the named trustee. The deed of trust gave the Bank the right to purchase the leases at a trustee's sale. It further provided that the mortgagor would surrender possession and control of the property to the purchaser at that sale.

On November 4, 1977, Thorn signed an Assignment of Lease which assigned the improvements lease to the Bank as security for a promissory note in the original principal sum of seventy thousand two hundred sixty-eight dollars and seventy-nine cents ($70,268.79). This assignment acted partly as a renewal and extension of the prior note. Thorn also signed a deed of trust which conveyed both leases, the land, and the improvements to the named trustee.

On March 21, 1977, the Secretary of State ordered Thorn's corporate charter forfeited for the failure of the company to pay franchise taxes. On May 6, 1980, the Bank foreclosed on its security interests in the leases and purchased the leases through a trustee's deed. The Bank took possession and control of the leased premises and it paid rent to McCullough.

On December 29, 1982, the Bank attempted, without McCullough's consent, to convey all interest in the leases and premises to Reynolds by a trustee's deed and quit claim deed. McCullough refused to accept any checks tendered by Reynolds for rent. The Bank attempted to cure defects in title by executing a special warranty deed conveying their interest in the ground lease to Reynolds, again, without McCullough's consent.

Reynolds sued McCullough and claimed ownership of two leaseholds as the assignee under the original lease. Reynolds' ownership was to include all improvements and tangible personal property from the inception of the lease. By counterclaim, McCullough sought to terminate the leases. The cause was tried to the trial court which entered a take nothing judgment against Reynolds and found that McCullough was entitled to take possession of the leased premises. Attorney's fees were also awarded to McCullough.

Reynolds alleges the following points of error on appeal:

Points of error one, eight, nine and thirteen complain of the trial court's award of attorney's fees to the appellees and the court's failure to award attorney's fees to the appellant;

Point of error number two complains of the trial court's finding that the ground lease was not freely assignable by the Bank;

Point of error three complains of the trial court's failure to find that the lease contained an implied provision that the lessor's refusal to allow an assignment must be reasonable;

Points of error four and five allege that the trial court committed error in awarding damages of eight hundred dollars ($800.00) per month;

Points of error six and seven allege that the trial court committed error in ruling that the lease was forfeited because the Bank was an indispensable party which was absent from the proceedings;

Point of error ten complains that the violation of a restriction on assignments is a breach of covenant and therefore the trial court committed error in ruling that the lease was forfeited; and

Points of error eleven and twelve allege that the trial court committed error in considering the ground lease and improvements lease together and holding that the ground lease controlled the improvements lease.

Reynolds suggests that the main issue before us is whether the ground lease was assignable by the Bank. The language of the ground lease requiring our consideration is the following:

IX.

Lessee shall have the right to assign this lease or sublease the leased premises and improvements thereon to Thorn Feed Lot, Inc., without the prior consent of Lessors or such other person, firm, organization or corporation to whom such an assignment or sublease has been given prior written consent by Lessors; but in the event of any assignment or sublease, the Lessee herein shall continue to be responsible to Lessors for all the terms, provisions, and obligations set forth in this lease between Lessors and Lessee. If the interests of Lessee or an assignee or sublease hereunder should be mortgaged, hypothecated, pledged or otherwise placed as collateral, mortgage, hypothecate, pledge or otherwise place as collateral any personal property on the leased premises owned by Lessee or any assignee or sublessee hereunder, Lessors by these presents do hereby subordinate all rights which they may have under this lease or at law to such mortgage or other lender, or each of them.

In addition we are asked to consider this language in a subordination clause:

Lessee further covenants that Lessee will not, except by way of mortgage of the leasehold estate to secure some actual indebtedness or construction loan, assign or transfer this Lease without the written consent of the majority in interest of the Lessors....

The interest of the Lessors in the leased premises, and the interests of any mortgagee or mortgagees of the fee thereof shall be junior and subordinate to the interest of any mortgagee or mortgagees of the Lessee's interest in the leased premises and the building or buildings thereon.

We must decide whether the Bank was a party to the initial loan transaction between McCullough and Thorn. We hold they were not a party. There is no evidence in the record that the Bank was mentioned in the leases or that the two principals considered the Bank to be a third-party beneficiary of their transaction. Our Supreme Court has held:

The intention of the contracting parties is of controlling significance to a determination that a third party may enforce the contract provision. Banker v. Breaux, 133 Tex. 183, 128 S.W.2d 23, 24 (1939). In deriving intent, we must begin with the presumption that parties contract for themselves, and a contract will not be construed as having been made for the benefit of third parties unless it clearly appears that such was the intention of the contracting parties.

Corpus Christi Bank & Trust v. Smith, 525 S.W.2d 501, 503-04 (Tex.1975) (emphasis added).

This Court has before it two written leases, a lease of the ground and a lease for improvements, which must be construed together because they constitute a single transaction between the lessor and lessee. See Alexander v. Baylor, 20 Tex. 560, 561 (1857). "In order to ascertain the entire agreement of the contracting parties, separate documents executed at the same time, for the same purpose, and in the course of the same transaction are to be construed together." Jim Walter Homes, Inc. v. Schuenemann, 668 S.W.2d 324, 327 (Tex.1984); cf. Henderson v. Little, 248 S.W.2d 759, 761 (Tex.Civ.App.--Amarillo 1952, writ ref'd n.r.e.) (independent contracts between different parties, not made with reference to each other, may not be construed together though one refers to the other). But see General Bonding & Casualty Insurance Co. v. McQuerry, 191 S.W. 858, 859 (Tex.Civ.App.--Amarillo 1917, no writ). As we consider both leases to be part of the same transaction, we will construe them together in order to ascertain the intent of the parties. Accordingly, we overrule point of error number twelve. Furthermore, we refuse to consider the assignment by Thorn to the Bank and the concomitant deed of trust as part of the same lease transaction.

The case before us involves the rights which spring from the lease transaction between McCullough and Thorn. The rights in controversy do not issue from the mortgagor/mortgagee relationship which subsequently arose between Thorn and the Bank. See generally, Citizens National Bank v. Texas & P. Ry. Co., 136 Tex. 333, 150 S.W.2d 1003, 1006 (1941) (stating it is the intention and purpose of the contracting parties, as disclosed by the instrument, which should control). Thorn transferred an assignment of lease and a deed of trust as security for a loan from the Bank. Thorn maintained possession, and it was obligated to follow the covenants of the lease. If Thorn defaulted, the Bank acquired possession of the lease through the deed of trust. The contract between McCullough and Thorn was for Thorn's benefit, and it was not intended to benefit the third party Lender. Since neither Reynolds or the Bank were parties to the original lease transaction, they may not seek to enforce the lease.

Reynolds relies heavily on the subordination clause located in the lease. He alleges that since "all rights" of McCullough are subordinate to the Bank's rights, McCullough cannot interfere with the Bank's exercise of any of its rights. Reynolds contends McCullough may not veto the assignment of the lease by the Bank to Reynolds.

Reynolds also alleges that even if the trial court was correct in holding that the subordination clause does not allow the Bank to rightfully assign without McCullough's consent, the common law of...